Investing in Australia

Does demand for property, in Sydney and Melbourne in particular, mean that home owners and investors are experiencing a pricing bubble? And is that likely to change in 2017?

South Africans seeking international buy-to-let properties may be tempted by promising vacancies for housing in Australia’s two largest cities, Sydney and Melbourne, but opportunities are tempered by exponentially rising prices. Australian Bureau of Statistics (ABS) data recorded for Q4 2016 has triggered speculation that the market may heat up further, as well as fears for ﬁrst-time property owners and potential investors wanting a step on the ladder. Released in March, the ABS figures showed Sydney and Melbourne property prices increased 5.2% and 5.3% respectively for the three months to December. Brisbane real estate prices increased by 2.2% and Perth only 0.3%, while across Australia’s six capital cities, the 4.1% growth was the strongest quarter since June 2015.

RIPPLE EFFECT

The Knight Frank Australian Residential Review May 2017 report, compiled by Michelle Ciesielski and based on the ABS data, indicates that Sydney experienced the strongest growth in median house prices at 54.6% over five years to December 2016. The city ranked highest among Australia’s capital cities at A$907,200. This has caused a ripple eﬀ ect into satellite cities such as Gosford, Wollongong and Newcastle. Ciesielski says the value of housing ﬁnance commitments in New South Wales in the three months to February 2017 decreased 3.6% on the previous year to A$21.7 billion, while Sydney building approvals in Q1 2017 increased to 3,995 houses and 8,405 apartments. House sale volumes decreased 4.2% and apartments 0.9%. Apartment rentals increased 1.8% over the year to achieve a A$565 weekly median, while houses remained constant at A$645. Vacancies for the city were only 1.7%. Ciesielski says the value of housing ﬁnance commitments in Victoria in the three months to February dropped 2% on the previous year to A$17.2bn. Melbourne experienced a 1.8% decrease in house building approvals in the three months ending March, but a 4.3% increase for apartments over the same period in 2016. House and apartment sales volumes increased

1.3% and 2% respectively, while March house values increased 2.2% to a median of A$825,500. Apartment values increased by 1.2% to a record median of A$521,000. Weekly apartment rentals increased 3.7% to A$420 and houses 2.2% to A$455. March vacancies were 2.3%. Gross rental yields across greater Melbourne decreased to 2.89% for houses and to 4.24% for apartments over the year.

RISING PRICES

Shane Oliver, chief economist of global investment management company AMP Capital, says the ABS results are “a clear sign the threats in Sydney and Melbourne are steadily rising”. He expects the “ridiculous prices” to slow during 2017 – and if that does not happen, he believes regulators will step in to cool activities. Cameron Kusher, CareLogic’s head of research for Australia, told ABC News Online that home prices in Sydney and Australia are “seeing more strength.” This upward trend, he says, is based on owners upgrading their homes as well as local and overseas investment. “It’s pretty clear it’s not coming from ﬁrst-time owners at the moment. We’ve pretty much got record low levels of ﬁrst-time buyer activity,” he says. According to Kusher, Australian Prudential Regulation Authority and the Reserve Bank of Australia will need to step in to slow the growth rate in Sydney and Melbourne for investors and foreign buyers. Says Kusher: “Over the year you will start to see that rate of growth slow, but it’s going to take a lot more intervention from a regulatory perspective to try and slow down this speeding market.”

AND THE RISK?

According to Oliver, authorities, including the Reserve Bank of Australia, are concerned about overheating house prices after Australian Securities and Investment Commission chairman Greg Medcraft described the Melbourne and Sydney housing markets as “a bubble” and Australian Prudential Regulation Authority chairman Wayne Byres warned of “a heightened risk”. Ratings agency Moody’s concurs, having found borrowers are increasingly falling behind on repayments. As vice president and senior analyst Alena Chen told The Guardian: “Weaker economic conditions in states reliant on the mining industry, rising underemployment, weak wages growth and less favourable housing market conditions will drive delinquencies higher.”

RETAIL AND OFFICES PSG

Wealth chief investment officer Adriaan Pask says earnings in the Australian property market are in line with expectations. The company’s Investment Research and Strategy Report Autumn 2017 indicates returns for that market – and in this case PSG is primarily referring to property stocks and commercial property over housing bricks and mortar – are driven by a steady demand for and low supply of oﬃ ce space in Sydney. Australian property monitor ﬁrm Domain Group’s chief economist Andrew Wilson believes December 2015 ﬁgures reﬂected falling Sydney property prices for the ﬁrst time in three years, and soft growth in Melbourne. Australian real estate company PRDnationwide’s national research manager Diaswati Mardiasmo says that while Sydney, Melbourne and Brisbane have experienced strong growth in the past year, there is also an “air of cautiousness” with buyers and sellers concerned about how far prices can rise before the market makes a correction. Mardiasmo believes Sydney and Melbourne will experience growth, but not at the speed sustained for the past two years. Meanwhile, UK-based global advisory BIS Oxford Economics MD Robert Mellor told a building industry prospects conference in Sydney this year that he expects the city’s house prices to drop about 5% over the next two years. South African companies are equally cautious. IP Global director for Africa George Radford says the property investment firm continues to have a high degree of conﬁdence in the overall direction of Australia’s eastern cities, given the data reﬂecting rising prices. However, increases in foreign buyer stamp duty in New South Wales, Victoria and Queensland, alongside significantly reduced mortgage availability for foreign borrowers, suggests that Australia is “a less attractive investment destination” than other tier one property markets globally.

Earnings in the Australian property market are in line with expectations –
Adriaan Pask, PSG Wealth chief investment officer